. . . because much of the content relates both to Washington, D.C., and "outside the beltway" -- the heartland, specifically Iowa -- and because after going from Iowa to Washington via Texas and California I subsequently returned, From DC 2 Iowa.

Thursday, October 13, 2011

Economic Recovery? It's Simple and Obvious

October 13, 2011, 1:45 p.m.

Recovery Requires Consumers, and Consumers Require Jobs

Yesterday [Oct. 12, 2011] the Senate refused to even debate, let alone pass, President Obama's jobs bill. As the New York Times editorialized:

[Photo credit: Pete Souza, White House.]

It was all predicted, but the unanimous decision by Senate Republicans on Tuesday to filibuster and thus kill President Obama’s jobs bill was still a breathtaking act of economic vandalism. There are 14 million people out of work, wages are falling, poverty is rising, and a second recession may be blowing in, but not a single Republican would even allow debate on a sound plan to cut middle-class taxes and increase public-works spending.

For at least the past three years I have been repeatedly blogging here on a similar theme, for example:

You can't improve business (profits, returns to shareholders, executive compensation) without improving retail sales; you can't improve retail sales without putting money in the hands, and confidence in the heads, of potential consumers; and unemployed consumers don't have money unless they are provided either unemployment compensation or wages from a public sector job (in an economy with a shrinking private sector).

Given our rotting, unattended, infrastructure (roads, bridges, pipelines, schools) resulting from the last 30 years of "tax cuts" it seems to me, given the same amount of money, that using it to create "jobs" makes more sense than providing it for "unemployment compensation."

But either makes more sense than trying to turn an economy around with "trickle down" -- whether tax cuts for the rich, or bailouts for the rich.

I may be naive, and I claim no credentials as an economist, but to me the solution to our economic doldrums has always seemed quite simple and obvious.

My son, Gregory, when providing computer consulting service, likes to respond to customers' frustration and confusion with, "There are three steps," which he then proceeds to set forth.

I'm not sure I can keep this to a three-step analytical progression, but it's not much more complex than that.

1. We have an economy that is driven -- for good or for ill, in boom times and bad -- overwhelmingly (say, 70% or more) by consumer spending.

2. We now have 25% or more of the workforce that is unemployed, significantly underemployed, or has given up trying to find work (for African-American, male, high school dropouts, between 18 and 25, it's well over 50%). Those who are in the workforce are, understandably, concerned that they might become unemployed. At best they are, again understandably, confused and worried about the future of our global economy, and America's role in it.

3. As a result, and as a variation on "the tragedy of the commons," while we would all be better off as members of an inter-dependent community if we would all spend more, the most rational thing for every individual to do, as an individual, is to save more and spend less.

4. Similarly, providing cash, tax breaks, and other incentives to business to increase hiring, and banks to increase lending, has not worked and will never work. Why? Because a corporate CEO would be nuts, and deserve being fired, if he or she were to borrow more money, to hire more workers, to increase production, at a time when their company is unable to sell what it already has in warehouses, on the shelves, or in showrooms. As evidence, we are told that business is now sitting on something like $2 trillion in cash. Clearly, it is a lack of demand, not a lack of capital, that is the problem. The private sector has repeatedly, and again recently, made clear that it is incapable of turning around a plummeting economy all by itself.

5. So what do I think is so "simple and obvious"?

We have a short term, immediate problem, and a longer range problem.

Longer range, to become globally competitive during the 21st Century we need to provide more education and training to more people, and provide incentives for entrepreneurial activity. (As someone has said, "There has never been a more difficult time to find a job; and never been an easier time to create a job.")

But short term, the way to bring ourselves out of the economic doldrums, to give a boost to our economy, to increase consumer spending, is to create more consumers, with greater confidence in their future prospects for employment. That means a full-employment economy; jobs for all; provided by the private sector when it's rational for business to do so, and provided by the federal government when it is not.

Don't start by talking about private sector jobs, or even "infrastructure." Start by talking about full employment -- or as near "full" as practicable.

In January of 2009, had we taken all the money we lavished on the banks, auto and insurance industries, and other large corporations, and used it for wages for all, our economy would have turned around by the fall of 2009 at the latest, and be humming along right now.

With the increase in consumer spending would have come the confidence of business. Once there is the prospect of continuing, dependable demand, smart business people are perfectly capable of providing the supply. And as the economy continued to spiral up, the federal payrolls would have contracted as better paying jobs would be created -- rationally created -- in the private sector marketplace.

Our unwillingness to take that path has hurt us all -- up to and including that "1%."

Can I put this in three steps?

1. If you have a downward spiraling economy, 70% of which represents consumer spending, you need to increase consumer spending.

2. If you have excessive unemployment and underemployment, you increase consumer spending by creating more consumers, with more money to spend.

3. If the private sector cannot create the jobs that create additional consumers, you must either (a) have the federal government become the "employer of last resort," or (b) resign yourself to the unnecessary prolonging of a grossly under-performing economy -- which has been our choice.

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Personal View

This blog is neither affiliated with the University of Iowa nor hosted by it. It is maintained by Nicholas Johnson in his individual capacity. Nothing posted here should be construed as anything other than the personal views of the author.